A collection of observations, news and resources on the changing nature of innovation, technology, leadership, and other subjects.

October 08, 2012

Why Innovation is Critical to Help Governments Adjust to the Realities of the 21st Century

Last week I wrote about the structural changes underway in countries around the world, driven primarily by the digital technology revolution and the forces of globalization. The private and public sectors have reacted quite differently to these structural changes. For the past twenty years, companies have embraced digital technologies to significantly improve their productivity and reduce costs.

Government has lagged the private sector. Government spending in affluent nations has been steadily going up over the past century. As shown in this chart published in March of 2011 as part of a special report on The Future of the State by The Economist, the average government spending as a percentage of GDP in thirteen rich world countries went from 26 percent in 1960 to 45 percent in 1990 and 48 percent in 2009. In the US, government spending went from 27 percent in 1960 to 33 percent in 1990 and 45 percent in 2009.

Given that these countries are confronted with aging populations, low birth rates and slow economic growth, the special report argues that the continuing growth of government is no longer sustainable. “With ageing populations to care for, many rich-world governments are on course for bankruptcy - unless they raise taxes to levels that would wreck their economies.”

According to The Economist, these governments must address two major structural issues: they must become more efficient; and they must seriously tackle the rising costs of public services by restructuring entitlement programs that are no longer affordable. Aligning government with 21st century economic realities will require innovations at least as disruptive and profound as those embraced by the private sector.

Productivity and cost reductions have been key business objectives over the past twenty years. Could some of the practices that have worked well in the private sector be applied to government?

To quote from the report: “Our government has an opportunity to dramatically reduce spending and cut the deficit, while also improving its level of service to citizens. By harnessing major technological shifts and adopting best business practices, we can not only make our government far more productive, but also foster greater innovation in areas ranging from healthcare to education and energy – innovation that will generate economic growth and job creation.”

“We have seen this repeatedly over the past several decades in our own industry, and in the impact of new technology models across our economy and society. Again and again, new capabilities have simultaneously reduced costs and sparked innovation.”

Given the inherent differences between business and government, it is reasonable to question the extent to which good ideas and best practices from the private sector can be applied to the public sector. After all, there is a huge difference between the key objectives of business - e.g., managing revenues and profits, and acquiring and retaining customers - and those of democratic governments, where the quality of life of its citizens, - so well embodied in the phrase life, liberty and the pursuit of happiness, - is among its top objectives.

Perhaps nowhere are these differences more apparent than in job creation, one of the toughest challenges facing nations around the world given the major structural changes their economies are going through. While companies have responsibilities to the communities in which they operate, for them job creation is not a primary responsibility, but a consequence of operating a successful, growing business. For governments, fostering an environment that enables the creation of well-paying jobs is one of their primary responsibilities and key to helping their citizens achieve a good standard of living and quality of life.

But there are also many similarities between government and business. Large government institutions and large companies are both complex organizations employing many people and providing a wide variety of services to their citizens and clients respectively. Both operate in increasingly fast-changing, complex, unpredictable environments. Both have access to innovative technologies and management practices that can be of significant help in dealing with their complex operations. And, regardless of whether dealing with citizens or clients, both can significantly benefit from running more efficient, collaborative organizations.

Making government more efficient is absolutely necessary, but far from sufficient. The second major structural change is the need for government to step up to the rising costs of public services. And they must do so while balancing government’s responsibility to improve the quality of life of its citizens while becoming more productive and reducing its overall costs.

What services should government continue to provide? Given that rising entitlements account for a large part of the growth of government, how do you decide which entitlements to transform, reduce or eliminate altogether? As population dynamics have significantly changed over the past century, with longer life spans, aging populations and lower birth rates, how should nations restructure their entitlements to make them more affordable?

These are extremely hard questions. They are at the root of many of the ideological debates taking place in the US and other countries around the world. Hard as it is, we must try to have rational, information-based discussions that will hopefully help us find the right balance between quality of life and affordability.

A few things are pretty clear. Healthcare costs have to be brought significantly down by reducing waste and unnecessary expensive procedures, especially those at end-of-life. Retirement age and pensions have to be adjusted to account for our longer life-expectancies and our ability to continue doing many kinds of work even as we get older. A good education must be available and affordable at all levels, given the very strong correlation between high educational attainment and low unemployment rates. Good physical and digital infrastructures are very important for economic success. Public safety, that is, freedom from high crime rates, civil conflicts and external threats, is of paramount importance to well-functioning communities and nations.

“Social organizations, those that provide services such as income support, pensions, disability programs, employment programs, child protection services or other similar services, are often under increased pressure from politicians and citizens alike. Collectively, these programs often comprise some of the largest portions of a country’s budget, on average 19 percent of GDP for developed countries. The proportion is rising: in 1980, it was only 16 percent, making these programs natural targets for those charged with reducing budget deficits. Added to this is the perceived issue of persistent fraud, waste and error. Even though these losses collectively may only be a small percentage of overall payments, they still represent a significant amount of money and foster a sense of mistrust and poor stewardship.”

“At the same time, demand for social assistance is rising relentlessly. Clients are asking for higher quality and availability of services. Changing demographics from aging populations to increasingly disenfranchised homeless populations, are further stretching the services of social organizations. It is within this context of shrinking resources and increasing demands that social organizations must rethink how they provide services if they are going to continue to meet the demands of both their clients and their various constituents from politicians to their staff to advocacy groups.”

There are no one-size-fits-all solutions for government innovation and reform, any more than there have been for business transformation. Different nations will make different choices. And in large, diverse societies like the US, it is quite likely that different states, regions and cities will come up with different approaches that best fit their respective constituencies.

Clearly, government and business have different objectives and operate by different rules. Most companies had to go through considerable turmoil and pain to adjust to the powerful forces restructuring our global economies. Those that didn’t, did not survive or are shadows of their former selves. But, there is a huge difference between failed companies and failed communities, cities or countries. Clients can easily find other companies to do business with in place of the ones no longer around. This is not the case with citizens.

As governments are now addressing some of these same powerful forces, they are going through even more turmoil and pain. It will take all our creativity, innovation and strength to help our governments and societies adjust to the new realities of the 21st century.